Former Hedge Fund Manager Sentenced to 14 Months in Prison

Former Hedge Fund Manager Sentenced to 14 Months in Prison

SAN FRANCISCO—Yesterday afternoon former hedge fund manager Lawrence R. (Larry) Goldfarb was sentenced to 14 months in prison for wire fraud, announced United States Attorney Melinda Haag and FBI Special Agent in Charge David J. Johnson.

Goldfarb, 55, previously of San Anselmo, Calif., was the managing partner of Baystar Capital II, L.P., a private investment fund. The fund primarily made short-term investments, but it also invested in various illiquid, more difficult-to-value investments referred to as “side pockets.” In approximately 2003, Baystar II made an $8.4 million side pocket investment in Island Fund LLC. Over the next several years, that investment returned more than $16 million. Without consulting or informing the investors in Baystar II, however, Goldfarb used a substantial amount of those funds to invest in other entities, including some in which he had an economic interest. When investors asked whether Island Fund had made distributions, Goldfarb intentionally failed to disclose that distributions had been made and that Goldfarb had used and reinvested the distributions, and he falsely told investors that they were not yet eligible for distributions. According to court documents, Goldfarb’s scheme to defraud investors caused losses of approximately $6 million.

In March 2011, Goldfarb entered into a Deferred Prosecution Agreement (DPA) with the United States Attorney’s Office and a Consent Judgment with the Securities and Exchange Commission. In those documents, Goldfarb promised to pay restitution and disgorgement of approximately $12 million pursuant to a payment schedule. After making some of the payments, Goldfarb failed to make the agreed payments. The Court determined that instead of paying the agreed upon restitution and disgorgement, Goldfarb spent hundreds of thousands of dollars on various personal indulgences, including Golden State Warriors season tickets, private air travel, and vacations. The Court concluded that Goldfarb had breached the DPA, denied defendant’s motion to dismiss the criminal charge against him, and allowed this prosecution to proceed. On April 16, 2014, Goldfarb pleaded guilty to the one count of wire fraud in the Information that had been filed against him in March 2011 in connection with the DPA.

The sentence was handed down by The Honorable William Alsup, United States District Court Judge, following a Goldfarb’s guilty plea to wire fraud, in violation of Title 18, United States Code, Section 1343. Judge Alsup also sentenced the defendant to a three-year period of supervised release to follow his prison sentence. Judge Alsup ordered the defendant to begin serving his prison sentence on Nov. 5, 2014.

Robert Leach and Doug Sprague are the Assistant U.S. Attorneys who are prosecuting the case with the assistance of Rawaty Yim. The prosecution is the result of an investigation by the FBI, with substantial assistance from the San Francisco Regional Office of the Securities and Exchange Commission.